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What to do with an inheritance

Knowing what to do if you receive or are about to receive an inheritance is a critical part of financial planning. This guide will walk you through the key considerations you will face.

Written by E4E Editor on 6 January 2020

Receiving an inheritance is a blessing as well as a responsibility in that it can bring life-altering changes, so knowing what to do with an inheritance is essential to avoid wasting a golden opportunity to change your life.

Often inheritances are a very difficult subject to discuss at any time as it will invariably involve the death of a loved one or a family member. Following the death of someone, emotions tend to be much more intense and can lead to poor decision making. It is common for people will feel guilt receiving any money from someone who has recently died.

Regardless of the emotional side, simply receiving a significant financial lump sum, whether expected or unexpected, will often have a major impact on someone’s life and will more often than not be life changing. Ultimately, an inheritance can usher in early retirement, fund a new career, pay off a mortgage, or simply sit in a savings account, providing a safety net for you and your loved ones, should you ever face a rainy day. 

Unfortunately it is also far too common that while the initial receipt of money may feel like it will lead to long term financial security, inheritances will not last as long as people expect – and this is almost certainly the case without careful planning and understand the opportunities, benefits and drawbacks of the options available.

Therefore, managing the inheritance with care is extremely important. When money passes from generation to generation, around 70% can be lost by the second generation and 90% by the third. This can be useful to bear in mind if you are in the fortunate position of inheriting wealth that somebody else saved, protected and worked hard to procure. 

Whether your inheritance can achieve all of the above or only some of it, we’ve put together a short guide to help you figure out how best to look after your money. 

Try to do some financial planning in advance

People will often fantasise about receiving a financial windfall, especially lottery wins, but due to the emotional conflict of receiving a financial windfall after the death of a loved one, people are less likely to consider what they would do when they receive an inheritance before it’s happened.

While it’s difficult to create a detailed plan, especially given that the exact time and amount of an inheritance is difficult to forecast, it is important to give some thought to what you might do when it happens.

Ultimately this is directly linked to having a good understanding of your current financial situation, what level of debt you are carrying, any mortgages, and how your retirement plans are shaping up.

Therefore, the first step of understanding what to do if you receive an inheritance has to be to review your current financial situation, understand your future plans and create your own financial plan, incorporating your risk appetite.

From this point you will be able more clearly understand how each option available will benefit you while also clarifying any potential downsides.

Don’t make a snap decision

First and foremost, never make a snap decision, don’t get suckered into buying a new car, giving up work, getting involved in a “too good to be true” investment opportunity – or even loaning some to someone who’s recently discovered your inheritance.

In fact, one of the soundest things you can do is find safe interest accounts (more than one if you are inheriting over £75k) and ensuring it is safe, secure and earning a little interest. But ultimately ensuring that you don’t feel like you have a significant lump sum of money in your bank account. This means that you are less likely to fritter it away but also give you space to think without the added emotion.

Establish how much debt you have and pay off what you can

If you are lucky enough to have no debt, then this obviously won’t apply to you. However, in most cases some people will at least have a mortgage, and potentially unsecured loans, credit cards and potentially overdrafts.

The most important thing to bear in mind here is interest rates. Your credit card debt, for example, is likely to have a much higher interest rate attached to it than your mortgage, which means your credit card is a higher priority. If you apply this reasoning to all your debts (if you can’t afford to pay them all off at once), once you know exactly how much you owe, and the costs of each debt, you can rank them in order of priority.

It’s normally a good idea to clear any expensive (i.e. high interest) debts first, but you may find that clearing all debt is not always the best course of action, especially if you have secured a low rate of interest.

Evaluate how clearing debt will change your monthly finances and then establish a financial budget to help ensure that you do not start accruing debt further down the line. One of the most common mistakes of people who clear debt, or make the debt manageable, is to get back into debt.

Choose whether to save or invest?

It’s extremely tempting, of course, to immediately spend a good amount of the money on luxurious items. Part of this impulse can be to spend the money before you know what the best plan is for it because, in your heart of hearts, you know the new sports car isn’t your soundest financial investment. 

We strongly recommend holding back on purchases like these. Money can always be put aside, after you’ve completed your planning, that you can actually afford to spend more impulsively. Make sure your future is protected by safeguarding yourself against existing debts and placing money aside in investments or savings accounts. This will increase your cash flow over your whole life, not just right now. 

It’s worth shopping around for a good savings account to place some of your money in, or you could always choose to invest. Though this can seem intimidating or risky, there are ways of spreading your money across a solid base of investments so that it grows over time.

For making sound investments and building a portfolio you can rely on, it’s always best to seek professional, impartial advice from a financial advisor. 

Give back, or pass on

Then there is the option of holding onto the money for future generations. This can be a wonderful way to honour the spirit in which the money was passed to you. If you have been able to achieve what you wanted to with some money still left over, why not set it aside for your children and grandchildren. 

Many people also choose to give a portion of their inheritance to charity. This is a great option, especially for anyone with considerable wealth already, to offset the privileges of those of us lucky enough to come into money when our parents pass away. To see the money go to parts of society where it is sorely needed is a gift in itself, and to know you used your good fortune to help others.

Allocate some money for personal enjoyment

Depending on the amount of money inherited, it shouldn’t always be about being careful. Once your debts and savings have been established, it’s reasonable to set aside a small percentage of the inheritance for your own enjoyment, whether that’s a holiday, home improvements or whatever takes your fancy.

Again, the most important thing is that any expenditure is carefully planned and accounted for. Stick to your budget and enjoy.

Get advice from an independent financial advisor

If you are struggling to make sense of your new financial situation, the wisest route would be to hire a financial advisor to help you manage your wealth.

Many people in this situation rely on and benefit from the services of someone who is a professional, who can be objective about your situation and who is an expert in these fields. This is true particularly if you plan to invest and try to grow the money, but also if you simply want to create a plan to make the best use of the inheritance. 

As with any financial decision, ensure that you have as much information available before making a decision and never rush into something that might sound too good to be true.

An independent financial advisor will be able to provide clear advice and guidance based on your current situation, future plans, risk profile and ultimately enable you to make a sound decision how to use the inheritance.

Remember, it’s never to early to speak to a specialist that will be able to guide your through all of your options, discussing the pros and cons and ultimately helping you create a financial plan.

Not only are independent financial advisors experts in assisting people, they will be able to remove the emotion of any inheritance and evaluate your personal situation to be able to offer you an independent financial plan.

When working with any professional, ensure that you fully understand the costs of any services due up front as well as any future charges. For people living outside of the UK and the EU, understanding how what financial protections cover you and advice received is vital. Not all countries have such stringent guidelines and protections.

Ultimately, remember that you must never sign any documents without knowing exactly what you are signing up to and are 100% clear on the costs and policy terms involved – and that you are completely comfortable with them.

Connect with a fee based independent financial advisor

Even if you no longer live in the UK your estate is likely to be exposed to unnecessary UK inheritance tax - and potentially death taxes in Spain. Gain expert guidance to help you minimise your exposure to inheritance taxes with independent financial advice tailored specifically to you.

Request a free introduction and we’ll connect you to one of our trusted independent financial advisors.